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Example 18.7 The Demand for Clean Air In Example 4.6 we used the demand curve for clean air to calculate the benefits of a cleaner environment. Now let's examine the public-good characteristics of clean air.

Example 18.7 The Demand for Clean Air In Example 4.6 we used the demand curve for clean air to calculate the benefits of a cleaner environment. Now let's examine the public-good characteristics of clean air.

Microeconomics A Contemporary Intro
Microeconomics A Contemporary Intro
10th Edition
ISBN:9781285635101
Author:MCEACHERN
Publisher:MCEACHERN
Chapter17: Externalities And The Environment
Section: Chapter Questions
Problem 13PAE
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Refer to the image Ch. 18, Example 18.7 - 'The Demand for Clean Air'

Why is clean air a public good?

What does Fig. 18.16 (image provided) show about the willingness to pay for clean air?

Example 18.7 The Demand for Clean Air In Example 4.6 we used the demand curve for clean air to calculate the benefits of a cleaner environment. Now let's examine the public-good characteristics of clean air. Many factors, including the weather, driving patterns, and industrial emissions, determine a region's air quality. Any effort to clean up the air will generally improve air quality throughout the region. As a result, clean air is nonexclusive: It is difficult to stop any one person from enjoying it. Clean air is also nonrival: My enjoyment does not inhibit yours. Because clean air is a public good, there is no market and no observable price at which people are willing to trade clean air for other commodities. Fortunately, we can infer people's willingness to pay for clean air from the housing market-households will pay more for a home located in an area with good air quality than for an otherwise identical home in an area with poor air quality. Let's look at the estimates of the demand for clean air obtained from a statistical analysis of housing data for the Boston metropolitan area. 25 The analysis correlates housing prices with the quality of air and other characteristics of the houses and their neighborhoods. Figure 18.160 shows three demand curves in which the value put on clean air depends on the level of nitrogen oxides and on income. The horizontal axis measures the level of air pollution in terms of parts per hundred million (pphm) of nitrogen oxide in the air. The vertical axis measures each household's willingness to pay for a one-part-per-hundred-million reduction in the nitrogen oxide level.
Transcribed Image Text:Example 18.7 The Demand for Clean Air In Example 4.6 we used the demand curve for clean air to calculate the benefits of a cleaner environment. Now let's examine the public-good characteristics of clean air. Many factors, including the weather, driving patterns, and industrial emissions, determine a region's air quality. Any effort to clean up the air will generally improve air quality throughout the region. As a result, clean air is nonexclusive: It is difficult to stop any one person from enjoying it. Clean air is also nonrival: My enjoyment does not inhibit yours. Because clean air is a public good, there is no market and no observable price at which people are willing to trade clean air for other commodities. Fortunately, we can infer people's willingness to pay for clean air from the housing market-households will pay more for a home located in an area with good air quality than for an otherwise identical home in an area with poor air quality. Let's look at the estimates of the demand for clean air obtained from a statistical analysis of housing data for the Boston metropolitan area. 25 The analysis correlates housing prices with the quality of air and other characteristics of the houses and their neighborhoods. Figure 18.160 shows three demand curves in which the value put on clean air depends on the level of nitrogen oxides and on income. The horizontal axis measures the level of air pollution in terms of parts per hundred million (pphm) of nitrogen oxide in the air. The vertical axis measures each household's willingness to pay for a one-part-per-hundred-million reduction in the nitrogen oxide level.
Figure 18.16 The Demand for Clean Air Willingness to Pay 3000 2500 High Income Middle Income 2000 Low Income 1500 1000 500 012 3 1 5 9 10 Nitrogen oxide (pphm) The three curves describe the willingness to pay for clean air (a reduction in the level of nitrogen oxides) for each of three different households (low income, middle income, and high income). In general, higher-income households have greater demands for clean air than lower-income households. Moreover, each household is less willing to pay for clean air as the level of air quality increases. The demand curves are upward-sloping because we are measuring pollution rather than clean air on the horizontal axis. As we would expect, the cleaner the air, the lower the willingness to pay for more of the good. These differences in the willingness to pay for clean air vary substantially. In Boston, for example, nitrogen oxide levels ranged from 3 to 9 pphm. A middle-income household would be willing to pay $800 for a 1 pphm reduction in nitrogen oxide levels when the level is 3 pphm, but the figure would jump to $2200 for a 1 pphm reduction when the level is 9 pphm. Note that higher-income households are willing to pay more than lower-income households to obtain a small improvement in air quality. At low nitrogen oxide levels (3 pphm), the differential between low- and middle-income households is only $200, but it increases to about $700 at high levels (9 pphm). With quantitative information about the demand for clean air and separate estimates of the costs of improving air quality, we can determine whether the benefits of environmental regulations outweigh the costs. A study by the National Academy of Sciences of regulations on automobile emissions did just this. The study found that controls would lower the level of pollutants, such as nitrogen oxides, by approximately 10 percent. The benefit of this 10-percent improvement to all residents of the United States was calculated to be approximately $2 billion. The study also estimated that it would cost somewhat less than $2 billion to install pollution control equipment in automobiles to meet emissions standards. The study concluded, therefore, that the benefits of the regulations did outweigh the costs.
Transcribed Image Text:Figure 18.16 The Demand for Clean Air Willingness to Pay 3000 2500 High Income Middle Income 2000 Low Income 1500 1000 500 012 3 1 5 9 10 Nitrogen oxide (pphm) The three curves describe the willingness to pay for clean air (a reduction in the level of nitrogen oxides) for each of three different households (low income, middle income, and high income). In general, higher-income households have greater demands for clean air than lower-income households. Moreover, each household is less willing to pay for clean air as the level of air quality increases. The demand curves are upward-sloping because we are measuring pollution rather than clean air on the horizontal axis. As we would expect, the cleaner the air, the lower the willingness to pay for more of the good. These differences in the willingness to pay for clean air vary substantially. In Boston, for example, nitrogen oxide levels ranged from 3 to 9 pphm. A middle-income household would be willing to pay $800 for a 1 pphm reduction in nitrogen oxide levels when the level is 3 pphm, but the figure would jump to $2200 for a 1 pphm reduction when the level is 9 pphm. Note that higher-income households are willing to pay more than lower-income households to obtain a small improvement in air quality. At low nitrogen oxide levels (3 pphm), the differential between low- and middle-income households is only $200, but it increases to about $700 at high levels (9 pphm). With quantitative information about the demand for clean air and separate estimates of the costs of improving air quality, we can determine whether the benefits of environmental regulations outweigh the costs. A study by the National Academy of Sciences of regulations on automobile emissions did just this. The study found that controls would lower the level of pollutants, such as nitrogen oxides, by approximately 10 percent. The benefit of this 10-percent improvement to all residents of the United States was calculated to be approximately $2 billion. The study also estimated that it would cost somewhat less than $2 billion to install pollution control equipment in automobiles to meet emissions standards. The study concluded, therefore, that the benefits of the regulations did outweigh the costs.
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